Question

We know that a profit maximizing firm will hire workers as long as those workers generate enough revenue to cover their wages.   Why might a firm decide to pay an efficiency wage to workers?   You should provide at least 2 reasons.

Answer 1

Efficiency wages are those salaries that are more than the market equality wages. Companies that pay efficiency wages could reduce their salaries and employ more workers, but select not to do so. Some causes that managers might select to pay efficiency wages are to escape shirking, decrease turnover, and entice productive workers.The concept of the efficiency wage theory is that enhancing wages can guide to enhanced labour productivity because employers feel more motivated to work with higher salaries.

Diagram 1

The following diagram presents the efficiency wages.

Reasons for why a firm decides to pay efficiency wage to workers:-

i) The main reason is that if workers are paid a higher salary, they have more to lose from being made unnecessary. So, if they have a job with a salary remarkably greater than profits or optional jobs, they will have higher motivation to influence their boss and keep it.

ii). Secondly, if employers get a higher salary, they may just feel more devotion towards the company and be ready to work harder and with more deductions.